Following are some basic terms relating to stocks and the stock market.
A share of stock represents a small part of the ownership of the company. If a company has 30 million shares and you own 100 shares, you own 0.00033% of the company. Many figures are divided by the number of shares to provide a common measure. For instance, Earnings / Share, Revenues / Share, or Book Value / Share. We'll talk about these terms in future sections on valuation.
There are several additional terms that you might see in relation to Shares:
Authorized Shares - This is the number of shares that the company has available to issue. They are usually issued only for ESOP programs, stock splits, and acquisitions. Most other uses or issuation of the authorized stock requires a shareholder vote.
Issued Shares - This is the number of shares used in most calculations. It is the number of authorized shares that have actually been issued.
Float - This is the number of shares issued which are owned by people outside of the company. Anyone who owns 5% or more of the stock is also considered "inside" the company and are not included in this number. If the float is considerably smaller than the issued shares, it may be hard for larger investors (including funds and institutions) to get in and out of the stock without dramatically affecting the stock price.
The Market Capitalization (or Market Cap) of a stock is the total value of all of the stock in the company. Just multiply the share price by the number of shares outstanding.
Example: As of 6/10/97, BT Office Products (NYSE:BTF) has a share price of $8.5 and has about 33.5 million shares outstanding. That's a market cap of about $285 million.
IPO is an acronym for Initial Public Offering, which is what takes place when a company first goes public. New investors often find IPO's intriguing, although in general they typically have a very poor track record, and it is quite difficult to buy shares in an IPO.
Most companies like to keep their stocks in a certain price range so that it is not "too expensive" for smaller investors. When a stock's price has appreciated towards the upper end of that range, they "split" the stock. In a two-for-one stock split (the most common type), each share of stock becomes two shares that are worth half as much. You still own the same dollar value of stock. This can cause temporary fluctuations in stock price (other than the split) due to the excitement over splitting.
Example: CompUSA (NYSE:CPU) on November 18, 1996 had a two-for-one stock split. Before the split, there were about 45 million shares at $44 per share. After the split, there were about 90 million shares at $22 per share.
Some larger stocks, especially utility stocks pay dividends. Essentially, they are giving part of their profits to shareholders rather than reinvesting it into the company. For smaller, faster growing companies, their profits are put to much better use by reinvesting in the company and funding growth. For this reason, most small companies and growth companies don't pay dividends.